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Prudhoe shutdown could cost state $2B But with PPT in place State of Alaska still comes out $308-$999 million ahead at Revenue’s $53.60 per barrel price case estimate By Kristen Nelson Petroleum News
With the majority of the State of Alaska’s revenues coming from royalties and severance taxes from crude oil production, the results of shutting down half of Prudhoe Bay — the state’s and the nation’s largest oil field — will be substantial.
Just how substantial, Department of Revenue Commissioner Bill Corbus told a joint House-Senate Resources committees meeting in Anchorage Aug. 18, depends on what the price of oil is over the next few months, and how long it takes BP Exploration (Alaska) to get the eastern operating area at Prudhoe Bay back online.
The department ran two scenarios to provide legislators with some sideboards on what the loss might look like as a result of the Aug. 6 shutdown of the eastern operating area at Prudhoe following discovery of extensive corrosion and a small leak in a transit line.
The pessimistic assumption is that Prudhoe Bay will produce at only 200,000 barrels per day (about half the normal rate) through the end of the fiscal year, June 30, 2007. The more optimistic scenario assumes that BP will be able to ramp the field up quickly and have it back to normal production rates by the end of December.
The department also looked at two price scenarios: the $53.60 per barrel for Alaska North Slope gas delivered on the West Coast that it forecast in its spring 2006 Revenue Source Book; and a scenario based on futures’ prices, with prices staying above $70 per barrel ANS West Coast delivery through the end of the fiscal year.
The loss at 200,000 bpd and futures’ prices through the end of the fiscal year would be $2.041 billion; at 200,000 bpd and the department’s forecast price the loss would be $1.149 billion.
If production returns to 400,000 bpd by the end of the year the loss would be $816 million at futures’ prices and $460 million at the department’s projected price. PPT makes a difference But those figures, Corbus said, are based on the budget the Legislature approved, and that was based on the old, economic limit factor-driven severance tax.
The PPT, the petroleum profits tax, passed by the Legislature and signed by Gov. Murkowski, makes a big difference.
At an Alaska North Slope crude oil price of $75.05 (the closing price Aug. 10, the day the Legislature passed the bill), and a full year of production, the new tax was expected to generate $3.7 billion in one-year revenues, almost three times the amount the present system generates.
Even at the pessimistic case, with 200,000 bpd from Prudhoe Bay through the end of the fiscal year, the PPT produces a revenue increase of $2.002 billion compared to the Revenue budget (under the ELF) at futures’ prices and $308 million at Revenue’s forecast price. The optimistic production forecast, with Prudhoe Bay back to 400,000 bpd by the end of December, is a revenue increase of $3.233 billion at futures’ prices and an increase of $999 million at Revenue’s forecast price.
The loss in barrels to the state, on an annual basis, is 69 million barrels (of an expected 300 million barrels) under the pessimistic scenario, a 23 percent drop, and a 21 million loss over the fiscal year, a 7 percent drop, under the optimistic scenario.
Corbus said that no matter the assumptions, “the loss to the state is substantial.”
But, due to higher oil prices for the fiscal year to date, and incremental revenues from the PPT, he said it is unlikely the state will have to cut spending to avoid a deficit.
On the issue of the value to the state of the shut-in barrels, Corbus said it isn’t just the time value of money, but also the price of oil. When the shut-in barrels are produced — soon or at the end of field life — isn’t the only issue, he noted, but what the price of crude oil is when those barrels are produced.
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